sent 27 January 2001
Re: "Interpreting Mr. Greenspan," New York Times, 26 January 2001.

To the Editor:

Has Chairman Greenspan become fiscally irresponsible? Your editorial ("Interpreting Mr. Greenspan", NYT, 26 January) suggests that the Chairman's lukewarm endorsement of tax cuts might spur Congress to accept the President's "extreme" ten-year, $1.6 trillion tax cut proposal.

There is growing bipartisan support for a tax cut, partially in recognition that the surplus has generated a recessionary bias. As you note, Mr. Greenspan prefers to rely on monetary policy to fight these recessionary forces, hence, he supported the tax cut on mostly technical grounds (as he gradually has come to realize that the projected surpluses will remove the safest asset from private sector portfolios!). However, given the likely shortfall of demand over the coming year, the fiscal adjustment that will be required is on the order of $450 billion per year. Not only is it wishful thinking to believe that interest rate reductions can eliminate that demand gap (a lesson learned in Japan over the past decade), it is also irresponsible to suggest that the boom can be continued by inducing firms and households to increase their deficit spending (now equal to 6.5% of GDP), adding to the record mountain of debt already burdening the private sector.

At most, the Bush administration will propose a $150 billion cut for next year. We support his proposal, but call for an immediate phase-in and for an additional $300 billion of tax relief annually. About half of that should come from a payroll tax cut (on both employers and employees), increasing the incentive to work and reducing pressures to downsize the labor force. Another $150 billion would come from retroactive tax refunds (say, $250 per taxpayer per year for tax years 2000 and forward), increases to the earned income tax credit, and additional tax credits for child care, health care, and education expenses. If Mr. Greenspan has become fiscally irresponsible, it is only because he should have recognized that the President's tax cut is far too modest.

Mathew Forstater
Director
Center for Full Employment and Price Stability
University of Missouri - Kansas City

L. Randall Wray
Senior Research Associate
Center for Full Employment and Price Stability
University of Missouri - Kansas City